Motilal Oswal maintains neutral rating on HDFC Life, raises share price target to Rs 625 - 10 pct potential upside
HDFC Life reported improvement in new business APE (Annual Premium Equivalent), led by Individual Protection / PAR (Performance Average Rating).
Motilal Oswal believes that Premium growth is steady for HDFC Life; Persistency rates showing recovery. HDFC Life reported improvement in new business APE (Annual Premium Equivalent), led by Individual Protection / PAR (Performance Average Rating) and Group savings business while the trend in ULIPs remained weak in 2QFY21. VNB (Value of New Business) margins improved to 25.6% led by rise in retail Protection/Annuity business and cost control. Thus, Absolute VNB grew 22% YoY during Q2 of FY21. On the persistency front, better trends were witnessed in the PAR / Protection business, and thus, 13th/25th month persistency improved by 200bp / 400bp. Overall, shareholders’ PAT grew 6% YoY to Rs 3.3 bn during Q2 FY21.
HDFC Life Individual Protection/PAR trends stay robust; VNB margins improve:
HDFC Life posted a strong Net premium income growth of 35% YoY, led by single premium growth of 66% YoY. Also, first year / renewal premium growth came in at 15%/21% YoY. Thus, the total new business premium grew 47% YoY over Q2 FY21. Persistency trends in the 13th / 25th month improved by 200 bps / 400 bps, led by improvement in the PAR/Protection segment.
In Q2 FY21, Individual / Group APE grew 18.5% / 35.5% YoY, leading to total new business APE growth of 21% YoY. The individual APE growth was mainly led by PAR (250% YoY) while retail Protection grew 28% YoY. On the other hand, the share of ULIPs in total individual APE declined to 21% v/s 27% in 1QFY21. Also, group Protection declined, led by credit life (down 32% YoY). The share of Protection in total APE declined to 11.6% (v/s 15.4% in 2QFY20).
VNB margins improved to 25.6% in 2QFY21 (v/s 24.3% in Q1 FY21 and 25.4% in Q2 FY20), on the back of improvement in product mix and cost efficiency. Absolute VNB for Q2 FY21 grew 22% YoY.
Total operating expenses (incl. commissions) grew 4.5% YoY, and thus, total expense ratio declined to 15.0% (430 bps YoY improvement).
The share of banca channels in individual APE increased to 60% (600 bp YoY) while the share of agents declined 200 bps YoY to 13% over the first half of FY21.
See Zee Business Live TV Streaming Below:
Highlights from management commentary:
1) HDFC Life is reflecting better business trends in the retail protection and annuity segment. Also, Banca channel is posting strong trends in the Sanchay Par advantage. However, credit life remains under pressure.
2) On the distribution front, HDFC Life has entered into a partnership with YES Bank during the quarter.
3) On the cost front, as business volumes pick up, there would be an increase in variable cost.
Valuation and view:
HDFC Life remains focused on maintaining a balanced product mix across the Savings / Protection businesses, with emphasis on product innovation and superior customer service. However, in the near term, Individual Protection / PAR segments are likely to see healthy growth while trends in ULIPs should remain sluggish. VNB margins have been broadly stable over the past few quarters; however, as retail Protection and Annuity mix improves, Motilal Oswal estimates margins to gradually improve to 26.4% by FY23E. Overall, they expect operating RoEV to remain steady at 18%. Motilal Oswal has introduced FY23E estimates and rolled forward their target price multiple to Sep’22 and value the stock at Rs 625.
(Authored by Rahul Kamdar)
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.